Will Keith Kellogg once estimated that 42 cereal companies were launched in the breakfast-food boom during the early years of the 20th century. His own venture, founded as the Battle Creek Toasted Corn Flake Company, was among the last, but it outlasted most of its early competitors and has dominated the ready-to-eat cereal industry. The Kellogg Company, as it was ultimately named, followed a straight and profitable path, avoiding takeovers and diversification, relying heavily on advertising and promotion, and posting profits nearly every year of its existence.

Kellogg’s Corn Flakes Are Born

By the time Kellogg launched his cereal company in 1906, he had already been in the cereal business for more than ten years as an employee of the Adventist Battle Creek Sanitarium run by his brother, Dr. John Harvey Kellogg. Dr. Kellogg, a strict vegetarian and the sanitarium’s internationally celebrated director, also invented and marketed various health foods. One of the foods sold by Dr. Kellogg’s Sanitas Food Company was called Granose, a wheat flake the Kellogg brothers had stumbled upon while trying to develop a more digestible form of bread. The wheat flake was produced one night in 1894 following a long series of unsuccessful experiments. The men were running boiled wheat dough through a pair of rollers in the sanitarium basement. The dough had always come out sticky and gummy, until by accident the experiments were interrupted long enough for the boiled dough to dry out. When the dry dough was run through the rollers, it broke into thin flakes, one for each wheat berry, and flaked cereals were born.

Commercial production of the Granose flakes began in 1895 with improvised machinery in a barn on the sanitarium grounds. The factory was soon in continuous production, turning out more than 100,000 pounds of flakes in its first year. A ten-ounce box sold for 15 cents, which meant that the Kelloggs collected $12 for each 60-cent bushel of wheat processed, a feat that did not go unnoticed around Battle Creek, Michigan.

In 1900 production was moved to a new $50,000 facility. When the new factory building was completed, Dr. Kellogg insisted that he had not authorized it, forcing W.K. to pay for it himself.

Meanwhile, other companies were growing quickly, but Dr. Kellogg refused to invest in the company’s expansion. Its most notable competitor was the Postum Cereal Company, launched by a former sanitarium patient, C.W. Post. Post added Grape-Nuts to his line in 1898 and by 1900 was netting $3 million a year, an accomplishment that inspired dozens of imitators and turned Battle Creek into the cereal-making capital of the United States.

In 1902 Sanitas improved the corn flake it had first introduced in 1898. The new product had better flavor and a longer shelf life than the 1898 version. By the following year the company was advertising in newspapers and on billboards, sending salesmen into the wholesale market, and introducing an ambitious door-to-door sampling program. By late 1905, Sanitas was producing 150 cases of corn flakes a day with sales of $100,000 a year.

Battle Creek Toasted Corn Flake Company Is Launched

The next year W.K. Kellogg launched the Battle Creek Toasted Corn Flake Company with the help of another enthusiastic former sanitarium patient. Kellogg recognized that advertising and promotion were the keys to success in a market flooded with look-alike products—the company spent a third of its initial working capital on an ad in Ladies Home Journal.

Orders, fueled by early advertising efforts, continually outstripped production, even after the company leased factory space at two additional locations. In 1907 output had reached 2,900 cases a day, with a net profit of about a dollar per case. In May 1907 the company became the Toasted Corn Flake Company. That July a fire destroyed the main factory building. On the spot, W.K. Kellogg began making plans for a new fireproof factory, and within a week he had purchased land at a site strategically located between two competing railroad lines. Kellogg had the new plant, with a capacity of 4,200 cases a day, in full operation six months after the fire. “That’s all the business I ever want,” he is said to have told his son, John L. Kellogg, at the time.

By the time of the fire, the company had already spent $300,000 on advertising but the advertising barrage continued. One anonymous campaign told newspaper readers to “wink at your grocer and see what your get.” Winkers got a free sample of Kellogg’s Corn Flakes. In New York City, the ad helped boost Corn Flake sales fifteen fold. In 1911 the advertising budget reached $1 million.

By that time, W.K. Kellogg had finally managed to buy out the last of his brother’s share of the company, giving him more than 50 percent of its stock. W.K. Kellogg’s company had become the Kellogg Toasted Corn Flake Company in 1909, but Dr. Kellogg’s Sanitas Food Company had been renamed the Kellogg Food Company and used similar slogans and packaging. W.K. sued his brother for rights to the family name and was finally successful in 1921.

Company Is Reincorporated as the Kellogg Company

In 1922 the company reincorporated as the Kellogg Company because it had lost its trademark claim to the name “Toasted Corn Flakes,” and had expanded its product line so much that the name no longer accurately described the company. Kellogg had introduced Krumbles in 1912, followed by 40% Bran Flakes in 1915, and All-Bran in 1916.

Kellogg also made other changes, improving his product, packaging, and processing methods. Many of those developments came from W.K.’s son John L. Kellogg, who began working for the company in its earliest days. J.L. Kellogg developed a malting process to give the corn flakes a more nut-like flavor, saved $250,000 a year by switching from a waxed paper wrapper on the outside of the box to a waxed paper liner inside, and invented All-Bran by adding a malt flavoring to the bran cereal. His father credited him with more than 200 patents and trademarks.

Sales and profits continued to climb, financing several additions to the Battle Creek plant and the addition of a plant in Canada, opened in 1914, as well as an ever-increasing advertising budget. The one exception came just after World War I, when shortages of raw materials and railcars crippled the once-thriving business. W.K. Kellogg returned from a world tour and canceled advertising contracts and sampling operations, and, for six months, he and his son worked without pay. The company issued $500,000 in gold notes in 1919, and in 1920 posted the only loss in its history. Still, Kellogg rejected a competitor’s buyout offer.

At that point the Battle Creek plant had 15 acres of floor space, production capacity of 30,000 cases a day, and a shipping capacity of 50 railcars a day. Each day it converted 15,000 bushels of white southern corn into Corn Flakes. The company had 20 branch offices and employed as many as 400 salesmen. During the next decade the Kellogg Company more than doubled the floor space at its Battle Creek factory and opened another overseas plant in Sydney, Australia, in 1924.

Also during that period, W.K. Kellogg began looking for a successor since in 1925 he had forced his son, who had served briefly as president, out of the company after J.L. had bought an oat-milling plant and divorced his wife to marry an office employee. W.K. Kellogg objected both to his son’s moral lapse and to his preference for oats. Several other presidents followed, but none could manage well enough to keep W.K. Kellogg away. During the Great Depression the company’s directors decided to cut advertising, premiums, and other expenses. When Kellogg heard of it, he returned from his California home, called a meeting, and told the officers to press ahead. They voted again, this time adding $1 million to the advertising budget. The company’s upward sales curve continued right through the Depression, and profits improved from around $4.3 million a year in the late 1920s to $5.7 million in the early 1930s.

In 1930 W.K. Kellogg established the W.K. Kellogg Foundation to support agricultural, health, and educational institutions. Kellogg eventually gave the foundation his majority interest in Kellogg Company. The company, under W.K.’s control, also did its part to fight unemployment, hiring a crew to landscape a ten-acre park on the Battle Creek plant grounds and introducing a six-hour, four-shift day.

Company Perspectives:

Kellogg is a global company committed to building long-term growth in volume and profit and to enhancing its worldwide leadership position by providing nutritious food products of superior value.

Vanderploeg is named President of Kellogg Company

In 1939 Kellogg finally found a permanent president, Watson H. Vanderploeg, who was hired away from a Chicago bank. Vanderploeg led the company from 1939 until his death in 1957. Vanderploeg expanded Kellogg’s successful advertise-and-grow policy, adding new products and taking them into new markets. In 1941 the company began a $1 million modernization program, updating old steam-generation equipment and adding new bins and processing equipment. The company also added new plants in the United States and abroad. Domestic plants were established in Omaha, Nebraska; Lockport, Illinois; San Leandro, California; and Memphis, Tennessee. Additional foreign operations were established in Manchester, England, in 1938, followed by plants in South Africa, Mexico, Ireland, Sweden, the Netherlands, Denmark, New Zealand, Norway, Venezuela, Colombia, Brazil, Switzerland, and Finland. During the five years after World War II, Kellogg expanded net fixed assets from $6.6 million to $20.6 million. As always, this expansion was financed entirely out of earnings.

The company also continued to add new products, but it never strayed far from the ready-to-eat cereal business. In 1952 more than 85 percent of sales came from ten breakfast cereals, although the company also sold a line of dog food, some poultry and animal feeds, and Gold Medal pasta. Barron’s noted that Kellogg’s profit margins, consistently between 6 and 7 percent of sales, were more than double those of other food companies. The company produced 35 percent of the nation’s ready-to-eat cereal and was the world’s largest manufacturer of cold cereal. Kellogg’s success came from its emphasis on quality products; high-speed automated equipment, which kept labor costs to about 15 percent of sales; and substantial foreign earnings that were exempt from the excess-profits tax. Dividends tended to be generous and had been paid every year since 1908; sales, which had been $33 million in 1939, began to top $100 million in 1948. By the early 1950s an estimated one-third of those sales were outside the United States.

Kellogg’s Begins Television Advertising

In the early 1950s Kellogg’s continued success was tied to two outside developments: the postwar baby boom and television advertising. To appeal to the new younger market, Kellogg and other cereal makers brought out new lines of presweetened cereals and unabashedly made the key ingredient part of the name. Kellogg’s entries included Sugar Frosted Flakes, Sugar Smacks, Sugar Corn Pops, Sugar All-Stars, and Cocoa Crispies. The company created cartoon pitchmen to sell the products on Saturday morning television. Tony the Tiger was introduced in 1953 following a contest to name the spokesperson for the new cereal, Kellogg’s Sugar Frosted Flakes of Corn. Sales and profits doubled over the decade and in 1960 Kellogg earned $21.5 million on sales of $256.2 million and boosted its market share to 40 percent.

The company continued adding new cereals, aiming some at adolescent baby boomers and others, like Special K and Product 19, at their parents. Kellogg’s Corn Flakes still led the cereal market and got more advertising support than any other cereal on grocers’ shelves. Kellogg poured nearly $10 million into Corn Flakes advertising in both 1964 and 1965, putting more than two-thirds of those dollars into television.

In 1969 Kellogg finally made a significant move away from the ready-to-eat breakfast-food business, acquiring Salada Foods, a tea company. The following year Kellogg bought Fearn International, which sold soups, sauces, and desserts to restaurants. Kellogg added Mrs. Smith’s Pie Company in 1976 and Pure Packed Foods, a maker of nondairy frozen foods for institutional customers, in 1977. Kellogg also bought several small foreign food companies.

Key Dates:

1894:

The wheat flake is first produced by Dr. John Harvey Kellogg and Will Keith Kellogg at the Sanitas Food Company.

1898:

Kellogg’s corn flake is introduced.

1905:

Granose (corn) flakes begin commercial production.

1906:

Battle Creek Toasted Corn Flake Company is founded in Battle Creek, Michigan, by Will Keith Kellogg.

1907:

The company is renamed Toasted Corn Flake Company; the main factory building is destroyed by fire.

General Mills passes Kellogg as the number one cereal maker; Kellogg acquires Keebler Foods.

The diversification may have been motivated in part by increasing attacks on Kellogg’s cereal business. Criticism boiled over in 1972 when the Federal Trade Commission (FTC) accused Kellogg and its leading rivals General Mills and General Foods of holding a shared monopoly and overcharging consumers more than $1 billion during the previous 15 years. The FTC said the companies used massive advertising (12 percent of sales), brand proliferation, and allocation of shelf space to keep out competitors and maintain high prices and profit margins. There was no disputing the profit margins, but the companies argued that the advertising and product proliferation were the result of competition, not monopoly. The cereal companies won their point following a lengthy hearing. During the same period, the industry’s presweetened cereals and related advertising also took a beating. The American Dental Association accused the industry of obscuring the sugar content of those cereals, and Action for Children’s Television lodged a complaint with the FTC, saying that the mostly sugar cereals were equivalent to candy. Kellogg flooded consumer groups and the FTC with data playing down the sugar content by showing that only three percent of a child’s sugar consumption comes from presweetened cereals. This publicity caused sugared-cereal sales to fall 5 percent in 1978, the first decline since their introduction in the 1950s.

The biggest threat to Kellogg’s continued growth wasn’t criticism, but rather the aging of its market. By the end of the 1970s growth slowed dramatically as the baby boom generation passed from the under-25 age group, which consumes an average of 11 pounds of cereal a year, to the 25 to 50 age group, which eats less than half as much cereal. Cereal-market growth dropped, and Kellogg lost the most. Its market share fell from 43 percent in 1972 to 37 percent in 1983.

New Chairman LaMothe Continues to Push Cereal Business

While Wall Street urged the company to shift its growth targets into anything but the stagnating cereal market, Kellogg continued to put its biggest efforts into its cereal business, emphasizing some of the same nutritional concepts that had given birth to the ready-to-eat breakfast business. And Kellogg was less unwilling than unable to diversify. It made three unsuccessful bids for the Tropicana Products orange juice company and another for Binney & Smith, makers of Crayola crayons. Despite its problems, Kellogg believed the cereal business still represented its best investment opportunity. “When you average 28 percent return on equity in your own business, it’s pretty hard to find impressive acquisitions,” said Chairman William E. LaMothe, a onetime salesman who became CEO in 1979.

In 1984 Kellogg bought about 20 percent of its own stock back from the W.K. Kellogg Foundation, a move that increased profits and helped defend the company against future takeover attempts, while satisfying a legal requirement limiting the holdings of foundations without giving potential raiders access to the stock.

Meanwhile, the company’s response to generally sagging markets in the late 1970s was much like W.K. Kellogg’s during the Depression: more advertising. Kellogg also boosted product research and stepped up new-product introductions. In 1979 the company rolled out five new products and had three more in test markets. By 1983 Kellogg’s research-and-development budget was $20 million, triple the 1978 allotment. Targeting a more health-conscious market, Kellogg spent $50 million to bring three varieties of Nutri-Grain cereal to market in 1982. Kellogg added almost as many products in the next two years as it had in the previous four. And in 1984 Kellogg sparked a fiber fad when it began adding a health message from the National Cancer Institute to its All-Bran cereal.

By the mid-1980s the results of Kellogg’s renewed assault on the cereal market were mixed. The company’s hopes of raising per capita cereal consumption to 12 pounds by 1985 fell flat. But Kellogg did regain much of its lost market share, claiming 40 percent in 1985, and it continued to outperform itself year after year. In 1986 Kellogg posted its 30th consecutive dividend increase, its 35th consecutive earnings increase, and its 42nd consecutive sales increase.

Kellogg Sells Tea Companies

In 1988 the company sold its U.S. and Canadian tea operations, in a demonstration of Kellogg’s renewed commitment to the cereal market. In the early 1990s, however, Kellogg failed to move fast enough to profit from the oat bran craze and lost market share in the United States, primarily to General Mills, Inc.’s oat-heavy brands such as Cheerios and Honey Nut Cheerios. Further erosion resulted from an upsurge in sales of private-label store brands, notably those produced by Ralston Purina Company spinoff Ralcorp Holdings Inc.. By developing knockoffs of such Kellogg standbys as Corn Flakes and Apple Jacks and selling them for as much as a dollar less per box, Ralcorp and other companies increased private-label cereal market share to 6 percent by 1994 at the expense of Kellogg and other makers of brand-name cereals. Sales of branded cereals increased only 3 percent in 1994 over 1993; in this flat market, Kellogg’s U.S. market share fell to as low as 33.8 percent in 1994.

In order to hold on to as much of its market share as it could, Kellogg management once again turned to increased marketing and advertising in 1990. Even in the face of the pressure from lower-priced private-label products, the company also continued to raise its prices in the early 1990s to generate sufficient revenue. This trend was finally reversed in 1994, however, when General Mills lowered its prices, forcing Kellogg to do the same.

In the midst of these difficulties, LaMothe retired in 1992 and was replaced as chairman and CEO by the president of Kellogg, Arnold G. Langbo. Under Langbo’s direction, the company underwent a reengineering effort in 1993 that committed the company to concentrate its efforts on its core business of breakfast cereal. That year and the next, Kellogg divested itself of such noncore assets as its Mrs. Smith’s Frozen Foods pie business, Cereal Packaging, Ltd., based in England, and its Argentine snack food business.

Its emphasis on its core business was also extended to its operations outside the United States, where company officials saw the greatest potential for future growth. By 1991 Kellogg held 50 percent of the non-U.S. cereal market, and 34 percent of its profits were generated outside the United States. In most of the markets in which it operated, it had at least six of the top ten cereal brands. Looking to the future, Kellogg’s primary target markets of Europe, Asia, and Latin America had not yet reached the more mature levels of the United States. While per capita cereal consumption in the United States was ten pounds per year, in most other markets it was less than two pounds. After expanding into Italy in the early 1990s, Kellogg became the first major cereal company to open plants in three markets: the former Soviet Union with a plant in Riga, Latvia, in 1993; India with a plant in Taloja, in 1994; and China with a plant in Guangzhou, in 1995. With these new operations, Kellogg had 29 plants operating in 19 countries and could reach consumers in almost 160 countries.

Kellogg Competes with General Mills for Market Share

Although Kellogg had a commanding position internationally, it faced a new and more formidable international competitor starting in 1989. General Mills and the Swiss food titan Nestle S.A. established a joint venture called Cereal Partners Worldwide (CPW), which essentially combined General Mills’ cereal brands and cereal-making equipment with Nestle’s name recognition in numerous markets and vast experience with retailers there. By 1994, CPW was already beginning to eat into Kellogg’s market share in various countries.

Overall, Kellogg’s 1990s difficulties had only slowed—not stopped—the firm’s tradition of continual growth. Net sales increased at the modest rates of 7 percent, 2 percent, and 4 percent in 1992, 1993, and 1994, respectively (1994 was Kellogg’s 50th consecutive year of sales growth). With U.S. sales still accounting for 59 percent of the overall total, however, and competition heating up overseas, Kellogg faced its most challenging environment since the early 1920s. In addition to its aggressive expansion into overseas markets with huge potential for growth, another promising sign for a bright future for Kellogg was a revitalized new product development program. More disciplined than the scattershot approach of the 1980s, the program was beginning to produce such winners as Low Fat Granola, Rice Krispies Treats, and a line of cereal developed as a result of the 1994 partnership with ConAgra, Inc., under the food conglomerate’s Healthy Choice brand.

In 1997 and 1998 operations were expanded in Australia, the United Kingdom, Asia, and Latin America, but extremely competitive market conditions resulted in declines in sales and earnings in 1998. The result was a refocusing in two key areas: new product development and the complete overhaul of corporate headquarters and the North American organization structure. Product development included the addition of new cereals, innovative convenience foods, and new grain-based products; product improvement measures added to the nutritional value of all products. The Ensemble line of heart-healthy foods was introduced in November 1998 and included frozen entrees, bread, dry pasta, baked potato crisps, frozen miniloaves, cookies, and a ready-to-eat cereal similar to General Mills’ Cheerios line.

An increase in overall marketing investments was targeted for the seven largest cereal markets: the United States, the United Kingdom, Mexico, Canada, Australia, Germany, and France. In response to the growth of “on-the-go” convenience foods, geographic distribution was expanded for such products as Nutri-Grain bars, Rice Krispies Treats squares, and Pop-Tarts toaster pastries.

New Chairman Gutierrez Reorganizes Company

In an effort to reduce costs and create a more focused and accountable workforce, about 25 percent of its North American workforce was let go and steps were taken toward the reorganization of the corporate structure. As a result, several top officers left in 1998 and 1999. In April 1999, Cuban-born and 25-year veteran of the company Carlos M. Gutierrez became CEO. Gutierrez’s vision for Kellogg was “to begin a process of renewal designed to strengthen significantly the ability of the Kellogg Company to compete and prosper in the 21st century.” His new team included eight new top executives, including four who joined the company in 1999 and 2000.

Gutierrez took many bolds steps to hold on to the company’s position as the world’s leading producer of ready-to-eat cereal in spite of declining stock value, including selling the Lender’s bagel division to Aurora Foods and shutting down the Ensemble line of cholesterol-reducing foods. Despite protestations from the community and workforce, the historic hometown plant in Battle Creek was closed and 550 jobs were eliminated. In late 1999, Kellogg acquired Worthington Foods, Inc., manufacturer of meat alternatives, frozen egg substitutes, and other healthy food products, under the brands of Morningstar Farms, Natural Touch, Worthington, and Loma Linda.

As in 1999, Kellogg continued the process of renewal in 2000, with its second consecutive year of earnings growth. Sales, however, declined by 0.4 percent and share performance was again disappointing. With sales falling or remaining stagnant in the ready-to-eat cereal business, the strategy of the company involved allocating resources first to the United States’ markets, and then to other core markets in the United Kingdom/Republic of Ireland, Mexico, Canada, and Australia/New Zealand; setting targets for long-term growth; and executing a sound business plan.

To strengthen their competitive position, in 2000 Kellogg acquired Kashi Company, a natural cereal company in the United States; two convenience food businesses in Australia; and the Mondo Baking Company, a manufacturer of convenience foods in Rome, Georgia. On October 26, the company announced that an agreement had been reached to acquire Keebler Foods Company, the largest acquisition in the 95-year history of the company. The acquisition, completed in March 2001, brought to Kellogg not only Keebler’s cookie and cracker business, but also their direct store door (DSD) delivery system, which was expected to increase the growth potential of snack foods such as Kellogg’s Nutri-Grain bars and Rice Krispies Treats squares.

In the fourth quarter of 2000, Kellogg’s operations were restructured into two major divisions—USA and International—to streamline operations and reduce costs. Kellogg International was further delineated into Europe, Latin America, Canada, Australia, and Asia. In U.S. operations, Kellogg’s Raisin Bran Crunch cereal remained the most successful new U.S. cereal product since the mid-1990s, with a 0.9 percent market share. Consumer promotions included American Airlines frequent flyer miles, and affiliations with NASCAR, the Olympics, and Major League Soccer. Other advertising connections were made with the movie How the Grinch Stole Christmas and Pokemon. Kellogg also launched Eet & Ern, an Internet-based consumer loyalty program.

The Kellogg International division had responsibility for all markets outside the United States, providing products to more than 160 countries on six continents worldwide. The four largest Kellogg International markets were the United Kingdom/Republic of Ireland, Mexico, Canada, and Australia/New Zealand. The United Kingdom/Republic of Ireland remained Kellogg’s largest market outside the United States, and experienced a 3 percent increase in cereal sales during 2000. The fastest growing international market was Mexico, where the direct store delivery system was effectively implemented.

Cereal competitor General Mills had closed the gap in the U.S. market share, and passed Kellogg in 2001 as the number one cereal maker. According to Kellogg CEO Gutierrez, “after a year of change, a stronger Kellogg is emerging.” The change marked the building of a better business model in which “short-term sales and earnings growth were sacrificed to lay the foundation for great value creation in the future.” In Kellogg USA, the acquisition of Keebler was completed in 2001 resulting in a more profitable sales mix. Advertising through brand-building was increased with tie-ins with Disney, American Airlines, and the Cartoon Network. In the cereal category, Special K Red Berries cereal was launched in March and proved to be the most successful new product in this category since the 1998 introduction of Raisin Bran Crunch. Pop-Tarts increased its sales and category share and benefited from the introduction of Chocolate Chip Pop-Tarts. A number of products in the snacks category benefited from the inclusion in Keebler’s direct store delivery system. Growth was also evident in the natural and frozen foods category, with Kashi proving to be the fastest growing brand in the natural cereals category.

Like Kellogg USA, Kellogg International’s focus on “volume to value” in 2001 was applied to sales, marketing, and new-product initiatives. In the United Kingdom, the most important brands and innovation projects were prioritized. Successful product campaigns were launched for Crunchy Nut Red cereal and Special K bars. Kellogg India Ltd. was permitted by the Foreign Investment Promotion Board to launch new products, Cheez-It Crackers, Keebler Cookiers, and Special K cereal. In other parts of Europe, Kellogg pulled back on investments in smaller markets and attempted to bring prices in line in preparation of the launch of the Euro currency.

By 2002 the Kellogg team, headed by Chairman Gutierrez, remained optimistic for the future of the Kellogg Company. After a year of significant changes, the company emerged “a stronger organization, (with) a tighter focus and revitalized employees whose determination is greater than ever.” The year 2002 indicated progress in the form of sustainable, reliable sales and earnings growth. With products manufactured in 19 countries and marketed in more than 160 countries worldwide, Kellogg showed more focus than ever to regain and retain its position as the world’s leading producer of cereal and a leading producer of convenience foods.

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Will Keith Kellogg once estimated that 42 cereal companies were launched in the breakfast-food boom during the early years of the twentieth century. His own venture, founded as the Battle Creek Toasted Corn Flake Company, was among the last, but it outlasted most of its early competitors and has dominated the ready-to-eat cereal industry every since. The Kellogg Company, as it was ultimately named, followed a straight and profitable path, avoiding takeovers and diversification, relying heavily on advertising and promotion, and posting profits nearly every year of its existence.

By the time Kellogg launched his cereal company in 1906 he had already been in the cereal business for more than ten years, as an employee of the Adventist Battle Creek Sanitarium run by his brother, Dr. John Harvey Kellogg. Dr. Kellogg, a strict vegetarian and the sanitarium’s internationally celebrated director, also invented and marketed various health foods. One of the foods sold by Dr. Kellogg’s Sanitas Food Company was called Granose, a wheat flake the Kellogg brothers had stumbled upon while trying to develop a more digestible form of bread. The wheat flake was produced one night in 1894 following a long series of unsuccessful experiments. The men were running boiled wheat dough through a pair of rollers in the sanitarium basement. The dough had always come out sticky and gummy, until by accident the experiments were interrupted long enough for the boiled dough to dry out. When the dry dough was run through the rollers, it broke into thin flakes, one for each wheat berry, and flaked cereals were born.

Commercial production of the Granose flakes began in 1895 with improvised machinery in a barn on the sanitarium grounds. The factory was soon in continuous production, turning out more than 100,000 pounds of flakes in its first year. A ten-ounce box sold for 15 cents, which meant that the Kelloggs collected $12 for each 60-cent bushel of wheat processed, a feat that did not go unnoticed around Battle Creek, Michigan.

In 1900 production was moved to a new $50,000 facility. When the new factory building was completed, Dr. Kellogg insisted that he had not authorized it, forcing W. K. to pay for it himself.

Meanwhile, other companies were growing quickly, but Dr. Kellogg refused to invest in the company’s expansion. Its most notable competitor was the Postum Cereal Company, launched by a former sanitarium patient, C. W. Post. Post added Grape-Nuts to his line in 1898 and by 1900 was netting $3 million a year, an accomplishment that inspired dozens of imitators and turned Battle Creek into the cereal-making capital of the United States.

In 1902 Sanitas improved the corn flake it had first introduced in 1898. The new product had better flavor and a longer shelf life than the 1898 version. By the following year the company was advertising in newspapers and on billboards, sending salesmen into the wholesale market, and introducing an ambitious door-to-door sampling program. By late 1905, Sanitas was producing 150 cases of corn flakes a day with sales of $100,000 a year.

The next year W. K. Kellogg launched the Battle Creek Toasted Corn Flake Company with the help of another enthusiastic former sanitarium patient. Kellogg recognized that advertising and promotion were key to success in a market flooded with look-alike products—the company spent a third of its initial working capital on an ad in Ladies Home Journal.

Orders, fueled by early advertising efforts, continually outstripped production, even after the company leased factory space at two additional locations. In 1907 output had reached 2,900 cases a day, with a net profit of about a dollar per case. In May 1907 the company became the Toasted Corn Flake Company. That July a fire destroyed the main factory building. On the spot, W. K. Kellogg began making plans for a new fireproof factory, and within a week he had purchased land at a site strategically located between two competing railroad lines. Kellogg had the new plant, with a capacity of 4,200 cases a day, in full operation six months after the fire. “That’s all the business I ever want,” he is said to have told his son, John L. Kellogg, at the time.

By the time of the fire, the company had already spent $300,000 on advertising but the advertising barrage continued. One anonymous campaign told newspaper readers to “wink at your grocer and see what your get.” Winkers got a free sample of Kellogg’s Corn Flakes. In New York City, the ad helped boost Corn Flake sales fifteenfold. In 1911 the advertising budget reached $1 million.

By that time, W. K. Kellogg had finally managed to buy out the last of his brother’s share of the company, giving him more than
50 percent of its stock. W. K. Kellogg’s company had become the Kellogg Toasted Corn Flake Company in 1909, but Dr. Kellogg’s Sanitas Food Company had been renamed the Kellogg Food Company and used similar slogans and packaging. W. K. sued his brother for rights to the family name and was finally successful in 1921.

In 1922 the company reincorporated as the Kellogg Company because it had lost its trademark claim to the name “Toasted Corn Flakes,” and had expanded its product line so much that the name no longer accurately described the company. Kellogg introduced Krumbles in 1912, followed by 40% Bran Flakes in 1915 and All-Bran in 1916.

Kellogg also made other changes, improving his product, packaging, and processing methods. Many of those developments came from W. K.’s son John L. Kellogg, who began working for the company in its earliest days. J. L. Kellogg developed a malting process to give the corn flakes a more nut-like flavor, saved $250,000 a year by switching from a waxed paper wrapper on the outside of the box to a waxed paper liner inside, and invented All-Bran by adding a malt flavoring to the bran cereal. His father credited him with more than 200 patents and trademarks.

Sales and profits continued to climb, financing several additions to the Battle Creek plant and the addition of a plant in Canada, opened in 1914, as well as an ever-increasing advertising budget. The one exception came just after World War I, when shortages of raw materials and rail cars crippled the once-thriving business. W. K. Kellogg returned from a world tour and canceled advertising contracts and sampling operations, and, for six months, he and his son worked without pay. The company issued $500,000 in gold notes in 1919 and in 1920 posted the only loss in its history. Still, Kellogg rejected a competitor’s buyout offer.

At that point the Battle Creek plant had 15 acres of floor space, production capacity of 30,000 cases a day, and a shipping capacity of 50 rail cars a day. Each day it converted 15,000 bushels of white southern corn into Corn Flakes. The company had 20 branch offices and employed as many as 400 salesmen. During the next decade the Kellogg Company more than doubled the floor space at its Battle Creek factory and opened another overseas plant in Sydney, Australia, in 1924.

Also during that period, W. K. Kellogg began looking for a successor since in 1925 he had forced his son, who served briefly as president, out of the company after John Kellogg bought an oat-milling plant and divorced his wife to marry an office employee. W. K. Kellogg objected both to his son’s moral lapse and to his preference for oats. Several other presidents followed, but none could manage well enough to keep W. K. Kellogg away. During the Great Depression the company’s directors decided to cut advertising, premiums, and other expenses. When Kellogg heard of it, he returned from his California home, called a meeting, and told the officers to press ahead. They voted again, this time adding $1 million to the advertising budget. The company’s upward sales curve continued right through the Depression, and profits improved from around $4.3 million a year in the late 1920s to $5.7 million in the early 1930s.

In 1930 W. K. Kellogg established the W. K. Kellogg Foundation to support agricultural, health, and educational institutions. Kellogg eventually gave the foundation his majority interest in Kellogg Company. The company, under W. K.’s control, also did its part to fight unemployment, hiring a crew to landscape a ten-acre park on the Battle Creek plant grounds and introducing a six-hour, four-shift day.

In 1939 Kellogg finally found a permanent president, Watson H. Vanderploeg, who was hired away from a Chicago bank. Vanderploeg led the company from 1939 until his death in 1957.

Vanderploeg expanded Kellogg’s successful advertise-and-grow policy, adding new products and taking them into new markets. In 1941 the company began a $1 million modernization program, updating old steam-generation equipment and adding new bins and processing equipment. The company also added new plants in the United States and abroad. Domestic plants were established in Omaha, Nebraska; Lockport, Illinois; San Leandro, California; and Memphis, Tennessee. Additional foreign operations were established in Manchester, England, in 1938, followed by plants in South Africa, Mexico, Ireland, Sweden, the Netherlands, Denmark, New Zealand, Norway, Venezuela, Colombia, Brazil, Switzerland, and Finland. During the five years after World War II, Kellogg expanded net fixed assets from $6.6 million to $20.6 million. As always, this expansion was financed entirely out of earnings.

The company also continued to add new products, but it never strayed far from the ready-to-eat cereal business. In 1952 more than 85 percent of sales came from ten breakfast cereals, although the company also sold a line of dog food, some poultry and animal feeds, and Gold Medal pasta. Barron’s noted that Kellogg’s profit margins, consistently between six and seven percent of sales, were more than double those of other food companies. The company produced 35 percent of the nation’s ready-to-eat cereal and was the world’s largest manufacturer of cold cereal. Kellogg’s success came from its emphasis on quality products; high-speed automated equipment, which kept labor costs to about 15 percent of sales; and substantial foreign earnings that were exempt from the excess-profits tax. Dividends tended to be generous and had been paid every year since 1908; sales, which had been $33 million in 1939, began to top $100 million in 1948. By the early 1950s an estimated one-third of those sales were outside the United States.

In the early 1950s Kellogg’s continued success was tied to two outside developments: the postwar baby boom, and television advertising. To appeal to the new younger market Kellogg and other cereal makers brought out new lines of presweetened cereals and unabashedly made the key ingredient part of the name. Kellogg’s entries included Sugar Frosted Flakes, Sugar Smacks, Sugar Corn Pops, Sugar All-Stars, and Cocoa Crispies. The company created Tony the Tiger and other cartoon pitchmen to sell the products on Saturday-morning television. Sales and profits doubled over the decade. In 1960 Kellogg earned $21.5 million on sales of $256.2 million and boosted its market share to 40 percent.

The company continued adding new cereals, aiming some at adolescent baby boomers and others, like Special K and Product
19 at their parents. Kellogg’s Corn Flakes still led the cereal market and got more advertising support than any other cereal on grocers’ shelves. Kellogg poured nearly $10 million into Corn Flakes advertising in both 1964 and 1965, putting more than two-thirds of those dollars into television.

In 1969 Kellogg finally made a significant move away from the ready-to-eat breakfast-food business, acquiring Salada Foods, a tea company. The following year Kellogg bought Fearn International, which sold soups, sauces, and desserts to restaurants. Kellogg added Mrs. Smith’s Pie Company in 1976 and Pure Packed Foods, a maker of non-dairy frozen foods for institutional customers, in 1977. Kellogg also bought several small foreign food companies.

The diversification may have been motivated in part by increasing attacks on Kellogg’s cereal business. Criticism boiled over in 1972 when the Federal Trade Commission (FTC) accused Kellogg and its leading rivals General Mills and General Foods of holding a shared monopoly and overcharging consumers more than $1 billion during the previous 15 years. The FTC said the companies used massive advertising (12 percent of sales), brand proliferation, and allocation of shelf space to keep out competitors and maintain high prices and profit margins. There was no disputing the profit margins, but the companies argued that the advertising and product proliferation were the result of competition, not monopoly. The cereal companies won their point following a lengthy hearing. During the same period, the industry’s presweetened cereals and related advertising also took a beating. The American Dental Association accused the industry of obscuring the sugar content of those cereals and Action for Children’s Television lodged a complaint with the FTC, saying that the mostly sugar cereals were equivalent to candy. Kellogg flooded consumer groups and the FTC with data playing down the sugar content by showing that only three percent of a child’s sugar consumption comes from presweetened cereals. This publicity caused sugared-cereal sales to fall five percent in 1978, the first decline since their introduction in the 1950s.

The biggest threat to Kellogg’s continued growth wasn’t criticism, but rather the aging of its market. By the end of the 1970s growth slowed dramatically as the baby boom generation passed from the under-25 group, which consumes an average of 11 pounds of cereal a year, to the 25-50 age group, which eats less than half as much cereal. Cereal-market growth dropped, and Kellogg lost the most. Its market share fell from 43 percent in 1972 to 37 percent in 1983.

While Wall Street urged the company to shift its growth targets into anything but the stagnating cereal market, Kellogg continued to put its biggest efforts into its cereal business, emphasizing some of the same nutritional concepts that had given birth to the ready-to-eat breakfast business. And Kellogg was less unwilling to diversify than unable. It made three unsuccessful bids for the Tropicana Products orange juice company and another for Binney & Smith, makers of Crayola Crayons. Despite its problems, Kellogg believed the cereal business still represented its best investment opportunity. “When you average 28 percent return on equity in your own business, it’s pretty hard to find impressive acquisitions,” said Chairman William E. LaMothe, a onetime salesman who became CEO in 1979.

In 1984 Kellogg bought about 20 percent of its own stock back from the W. K. Kellogg Foundation, a move that increased profits and helped defend the company against future takeover attempts while satisfying a legal requirement limiting the holdings of foundations without giving potential raiders access to the stock.

Meanwhile, the company’s response to generally sagging markets in the late 1970s was much like Will Kellogg’s during the Depression: more advertising. Kellogg also boosted product research and stepped up new-product introductions. In 1979 the company rolled out five new products and had three more in test markets. By 1983 Kellogg’s research-and-development budget was $20 million, triple the 1978 allotment. Targeting a more health-conscious market, Kellogg spent $50 million to bring three varieties of Nutri-Grain cereal to market in 1982. Kellogg added almost as many products in the next two years as it had in the previous four. And in 1984 Kellogg sparked a fiber fad when it began adding a health message from the National Cancer Institute to its All-Bran cereal.

By the mid-1980s the results of Kellogg’s renewed assault on the cereal market were mixed. The company’s hopes of raising per capita cereal consumption to 12 pounds by 1985 fell flat. But Kellogg did regain much of its lost market share, claiming 40 percent in 1985, and it continued to outperform itself year after year. In 1986 Kellogg posted its 30th consecutive dividend increase, its 35th consecutive earnings increase, and its 42nd consecutive sales increase.

In 1988 the company sold its U.S. and Canadian tea operations, in a demonstration of Kellogg’s renewed commitment to the cereal market. In the early 1990s, however, Kellogg failed to move fast enough to profit from the oat bran craze and lost market share in the United States, primarily to General Mills Inc.’s oat-heavy brands such as Cheerios and Honey Nut Cheer-ios. Further erosion resulted from an upsurge in sales of private-label store brands, notably those produced by Ralston Purina Co. spin-off Ralcorp Holdings Inc. By developing knockoffs of such Kellogg standbys as Corn Flakes and Apple Jacks and selling them for as much as a dollar less per box, Ralcorp and other companies increased private-label cereal market share to six percent by 1994 at the expense of Kellogg and other makers of brand-name cereals. Sales of branded cereals increased only three percent in 1994 over 1993; in this flat market, Kellogg’s U.S. market share fell to as low as 33.8 percent in 1994.

In order to hold on to as much of its market share as it could, Kellogg management once again turned to increased marketing and advertising in 1990. Even in the face of the pressure from lower-priced private-label products, the company also continued to raise its prices in the early 1990s to generate sufficient revenue. This trend was finally reversed in 1994, however, when General Mills lowered its prices, forcing Kellogg to do the same.

In the midst of these difficulties, LaMothe retired in 1992 and was replaced as chairman and CEO by the president of Kellogg, Arnold G. Langbo. Under Langbo’s direction, the company underwent a reengineering effort in 1993 that committed the company to concentrate its efforts on its core business of breakfast cereal. That year and the next, Kellogg divested itself
of such noncore assets as its Mrs. Smith’s Frozen Foods pie business, Cereal Packaging, Ltd., based in England, and its Argentine snack food business.

Its emphasis on its core business was also extended to its operations outside the United States, where company officials saw the greatest potential for future growth. By 1991 Kellogg held 50 percent of the non-U.S. cereal market, and 34 percent of its profits were generated outside the United States. In most of the markets in which it operated, it had at least six of the top ten cereal brands. Looking to the future, Kellogg’s primary target markets of Europe, Asia, and Latin America had not yet reached the more mature levels of the United States. While per capita cereal consumption in the United States was ten pounds per year, in most other markets it was less than two pounds. After expanding into Italy in the early 1990s, Kellogg became the first major cereal company to open plants in three markets: the former Soviet Union with a plant in Riga, Latvia, in 1993; India with a plant in Taloja, in 1994; and China with a plant in Guangzhou, in 1995. With these new operations, Kellogg had 29 plants operating in 19 countries and could reach consumers in almost 160 countries.

Although Kellogg had a commanding position internationally, it faced a new and more formidable international competitor starting in 1989. General Mills and the Swiss food titan Nestlé S.A. established a joint venture called Cereal Partners Worldwide (CPW), which essentially combined General Mills’s cereal brands and cereal-making equipment with Nestlé’s name recognition in numerous markets and vast experience with retailers there. By 1994, CPW was already beginning to eat into Kellogg’s market share in various countries.

Overall, Kellogg’s 1990s difficulties had only slowed—not stopped—the firm’s tradition of continual growth. Net sales increased at the modest rates of seven percent, two percent, and four percent in 1992, 1993, and 1994, respectively (1994 was Kellogg’s 50th consecutive year of sales growth). With U.S. sales still accounting for 59 percent of the overall total, however, and competition heating up overseas, Kellogg faced its most challenging environment since the early 1920s. In addition to its aggressive expansion into overseas markets with huge potential for growth, another promising sign for a bright future for Kellogg was a revitalized new product development program. More disciplined than the scattershot approach of the 1980s, the program was beginning to produce such winners as Low Fat Granola, Rice Krispies Treats, and a line of cereal developed in partnership with ConAgra, Inc., under the food conglomerate’s Healthy Choice brand.

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Will Keith Kellogg once estimated that 42 cereal companies were launched in the breakfast-food boom during the early years of the 20th century. His own venture, chartered as the Battle Creek Toasted Corn Flake Company, was among the last, but it outlasted most of its early competitors and has dominated the ready-to-eat cereal industry every since. The Kellogg Company, as it was ultimately named, followed a straight and profitable path, avoiding takeovers and diversification, relying heavily on advertising and promotion, and posting profits nearly every year of its existence.

By the time Kellogg launched his cereal company in 1906 he had already been in the cereal business for more than ten years, as an employee of his brother’s Adventist Battle Creek Sanitarium. Dr. John Harvey Kellogg, a strict vegetarian and the sanitarium’s internationally celebrated director, also invented and marketed various health foods. One of the foods sold by Dr. Kellogg’s Sanitas Food Company was called Granose, a wheat flake the Kellogg brothers had stumbled upon while trying to develop a more digestible form of bread. The wheat flake was produced one night in 1894 following a long series of unsuccessful experiments. The men were running boiled wheat dough through a pair of rollers in the sanitarium basement. The dough had always come out sticky and gummy, until by accident the experiments were interrupted long enough for the boiled dough to dry out. When the dry dough was run through the rollers, it broke into thin flakes, one for each wheat berry, and flaked cereals were born.

Commercial production of the Granose flakes began in 1895 with improvised machinery in a barn on the sanitarium grounds. The factory was soon in continuous production, turning out more than 100,000 pounds of flakes in its first year. A ten-ounce box sold for 15 cents, which meant that the Kelloggs collected $12 for each 60-cent bushel of wheat processed, a feat that did not go unnoticed around Battle Creek, Michigan.

In 1900 production was moved to a new $50,000 facility. When the new factory building was completed, Dr. Kellogg insisted that he had not authorized it, forcing W. K. to pay for it himself.

Meanwhile, other companies were growing quickly, but Dr. Kellogg refused to invest in the company’s expansion. Its most notable competitor was the Postum Cereal Company, launched by a former sanitarium patient, C. W. Post. Post added Grape-Nuts to his line in 1898 and by 1900 was netting $3 million a year, an accomplishment that inspired dozens of imitators and turned Battle Creek into the cereal-making capital of the United States.

In 1902 Sanitas improved the corn flake it had first introduced in 1898. The new product had better flavor and a longer shelf life than the unsuccessful 1898 version. By the following year the company was advertising in newspapers and on billboards, sending salesmen into the wholesale market, and introducing an ambitious door-to-door sampling program. By late 1905, Sanitas was producing 150 cases of corn flakes a day with sales of $100,000 a year.

The next year W. K. Kellogg launched the Battle Creek Toasted Corn Flake Company with the help of another enthusiastic former sanitarium patient. Kellogg recognized that advertising and promotion were key to success in a market flooded with look-alike products—the company spent a third of its initial working capital on an ad in Ladies Home Journal.

Orders, fueled by early advertising efforts, continually outstripped production, even after the company leased factory space at two additional locations. In 1907 output had reached 2,900 cases a day, with a net profit of about a dollar per case. In May, 1907 the company became the Toasted Corn Flake Company. That July a fire destroyed the main factory building. On the spot, W. K. Kellogg began making plans for a new fireproof factory, and within a week he had purchased land at a site strategically located between two competing railroad lines. Kellogg had the new plant, with a capacity of 4,200 cases a day, in full operation six months after the fire. “That’s all the business I ever want,” he is said to have told his son, John L. Kellogg, at the time.

By the time of the fire, the company had already spent $300,000 on advertising but the advertising barrage continued. One anonymous campaign told newspaper readers to “wink at your grocer and see what your get.” (Winkers got a free sample of Kellogg’s Corn Flakes.) In New York City, the ad helped boost Corn Flake sales fifteenfold. In 1911 the advertising budget reached $1 million.

By that time, W. K. Kellogg had finally managed to buy out the last of his brother’s share of the company, giving him more than 50% of its stock. W. K. Kellogg’s company had become the Kellogg Toasted Corn Flake Company in 1909, but Dr. Kellogg’s Sanitas Food Company had been renamed the Kellogg Food Company and used similar
slogans and packaging. W. K. sued his brother for rights to the family name and was finally successful in 1921.

In 1922 the company reincorporated as the Kellogg Company because it had lost its trademark claim to the name “Toasted Corn Flakes,” and had expanded its product line so much that the name no longer accurately described the company. Kellogg introduced Krumbles in 1912, followed by 40% Bran Flakes in 1915 and All-Bran in 1916.

Kellogg also made other changes, improving his product, packaging, and processing methods. Many of those developments came from W. K.’s son John L. Kellogg, who began working for the company in its earliest days. J. L. Kellogg developed a malting process to give the corn flakes a more nut-like flavor, saved $250,000 a year by switching from a waxed paper wrapper on the outside of the box to a waxed paper liner inside, and invented All-Bran by adding a malt flavoring to the bran cereal. His father credited him with more than 200 patents and trademarks.

Sales and profits continued to climb, financing several additions to the Battle Creek plant and the addition of a plant in Canada, opened in 1914, as well as an ever-increasing advertising budget. The one exception came just after World War I, when shortages of raw materials and rail cars crippled the once-thriving business. W. K. Kellogg returned from a world tour and canceled advertising contracts and sampling operations, and, for six months, he and his son worked without pay. The company issued $500,000 in gold notes in 1919 and in 1920 posted the only loss in its history. Still, Kellogg rejected a competitor’s buyout offer.

At that point the Battle Creek plant had 15 acres of floor space, production capacity of 30,000 cases a day, and a shipping capacity of 50 rail cars a day. Each day it converted 15,000 bushels of white southern corn into Corn Flakes. The company had 20 branch offices and employed as many as 400 salesmen. During the next decade the Kellogg Company more than doubled the floor space at its Battle Creek factory and opened another overseas plant in Sydney, Australia, in 1924.

Also during that period, W. K. Kellogg began looking for a successor since in 1925 he had forced his son, who served briefly as president, out of the company after John Kellogg bought an oat-milling plant and divorced his wife to marry an office girl. W. K. Kellogg objected both to his son’s moral lapse and to his preference for oats. Several other presidents followed, but none could manage well enough to keep W. K. Kellogg away. During the Great Depression the company’s directors decided to cut advertising, premiums, and other expenses. When Kellogg heard of it, he returned from his California home, called a meeting, and told the officers to press ahead. They voted again, this time adding $1 million to the advertising budget. The company’s upward sales curve continued right through the Depression, and profits improved from around $4.3 million a year in the late 1920s to $5.7 million in the early 1930s.

In 1930 W. K. Kellogg established the W. K. Kellogg Foundation to support agricultural, health, and educational institutions. Kellogg eventually gave the foundation his majority interest in Kellogg Company. The company, under W. K.’s control, also did its part to fight unemployment, hiring a crew to landscape a ten-acre park on the Battle Creek plant grounds and introducing a six-hour, four-shift day.

In 1939 Kellogg finally found a permanent president, Watson H. Vanderploeg, who was hired away from a Chicago bank. Vanderploeg led the company from 1939 until his death in 1957.

Vanderploeg expanded Kellogg’s successful advertise-and-grow policy, adding new products and taking them into new markets. In 1941 the company began a $1 million modernization program, updating old steam-generation equipment and adding new bins and processing equipment. The company also added new plants in the United States and abroad. Domestic plants were established at Omaha, Nebraska; Lockport, Illinois; San Leandro, California; and Memphis, Tennessee. Additional foreign operations were established in Manchester, England in 1938, followed by plants in South Africa, Mexico, Ireland, Sweden, the Netherlands, Denmark, New Zealand, Norway, Venezuela, Colombia, Brazil, Switzerland, and Finland. During the five years after World War II, Kellogg expanded net fixed assets from $6.6 million to $20.6 million. As always, this expansion was financed entirely out of earnings.

The company also continued to add new products, but it never strayed far from the ready-to-eat cereal business. In 1952 more than 85% of sales came from ten breakfast cereals, although the company also sold a line of dog food, some poultry and animal feeds, and Gold Medal pasta. Barron’s noted that Kellogg’s profit margins, consistently between 6% and 7% of sales, were more than double those of other food companies. The company produced 35% of the nation’s ready-to-eat cereal and was the world’s largest manufacturer of cold cereal. Kellogg’s success came from its emphasis on quality products; high-speed automated equipment, which kept labor costs to about 15% of sales; and substantial foreign earnings that were exempt from the excess-profits tax. Dividends tended to be generous and had been paid every year since 1908; sales, which had been $33 million in 1939, began to top $100 million in 1948. By the early 1950s an estimated one-third of those sales were outside the United States.

In the early 1950s Kellogg’s continued success was tied to two outside developments: the postwar baby boom, and television advertising. To appeal to the new younger market, Kellogg and other cereal makers brought out new lines of presweetened cereals and unabashedly made the key ingredient part of the name. Kellogg’s entries included Sugar Frosted Flakes, Sugar Smacks, Sugar Corn Pops, Sugar All-Stars, and Cocoa Crispies. The company created Tony the Tiger and other cartoon pitchmen to sell the products on Saturday-morning television. Sales and profits doubled over the decade. In 1960 Kellogg earned $21.5 million on sales of $256.2 million and boosted its market share to 40%.

The company continued adding new cereals, aiming some at adolescent baby boomers and others, like Special K and Product 19 at their parents. Kellogg’s Corn Flakes still led the cereal market and got more advertising support
than any other cereal on grocers’ shelves. Kellogg poured nearly $10 million into Corn Flakes advertising in both 1964 and 1965, putting more than two-thirds of those dollars into television.

In 1969 Kellogg finally made a significant move away from the ready-to-eat breakfast-food business, acquiring Salada Foods, a tea company. The following year Kellogg bought Fearn International, which sold soups, sauces, and desserts to restaurants. Kellogg added Mrs. Smith’s Pie Company in 1976 and Pure Packed Foods, a maker of non-dairy frozen foods for institutional customers, in 1977. Kellogg also bought several small foreign food companies.

The diversification may have been motivated in part by increasing attacks on Kellogg’s cereal business. Criticism boiled over in 1972 when the Federal Trade Commission (FTC) accused Kellogg and its leading rivals General Mills and General Foods of holding a shared monopoly and overcharging consumers more than $1 billion during the previous 15 years. The FTC said the companies used massive advertising (12% of sales), brand proliferation, and allocation of shelf space to keep out competitors and maintain high prices and profit margins. There was no disputing the profit margins, but the companies argued that the advertising and product proliferation were the result of competition, not monopoly. The cereal companies won their point following a lengthy hearing. During the same period, the industry’s presweetened cereals and related advertising also took a beating. The American Dental Association accused the industry of obscuring the sugar content of those cereals and Action for Children’s Television lodged a complaint with the FTC, saying that the mostly sugar cereals were equivalent to candy. Kellogg flooded consumer groups and the FTC with data downplaying the sugar content by showing that only 3% of a child’s sugar consumption comes from presweetened cereals. This publicity caused sugared-cereal sales to fall 5% in 1978, the first decline since their introduction in the 1950s.

But the biggest threat to Kellogg’s continued growth wasn’t criticism but the aging of its market. By the end of the 1970s growth slowed dramatically as the baby-boom generation passed from the under-25 group, which consumes an average of 11 pounds of cereal a year, to the 25-50 age group, which eats less than half as much cereal. Cereal-market growth dropped, and Kellogg lost the most. Its market share fell from 43% in 1972 to 37% in 1983.

While Wall Street urged the company to shift its growth targets into anything by the stagnating cereal market, Kellogg continued to put its biggest efforts into its cereal business, emphasizing some of the same nutritional concepts that had given birth to the ready-to-eat breakfast business. And Kellogg was less unwilling to diversify than unable. It made three unsuccessful bids for the Tropicana Products orange juice company and another for Binney & Smith, makers of Crayola Crayons. Despite its problems, Kellogg believed the cereal business still represented its best investment opportunity. “When you average 28% return on equity in your own business, it’s pretty hard to find impressive acquisitions,” said Chairman William E. LaMothe, a onetime salesman who became CEO in 1979.

In 1984 Kellogg bought about 20% of its own stock back from the W. K. Kellogg Foundation, a move that increased profits and helped defend the company against future takeover attempts while satisfying a legal requirement limiting the holdings of foundations without giving potential raiders access to the stock.

Meanwhile, the company’s response to generally sagging markets in the late 1970s was much like Will Kellogg’s during the Depression: more advertising. Kellogg also boosted product research and stepped up new-product introductions. In 1979 the company rolled out five new products and had three more in test markets. By 1983 Kellogg’s research-and-development budget was $20 million, triple the 1978 allotment. Targeting a more health-conscious market, Kellogg spent $50 million to bring three varieties of Nutri-Grain cereal to market in 1982. Kellogg added almost as many products in the next two years as it had in the previous four. And in 1984 Kellogg sparked a fiber fad when it began adding a health message from the National Cancer Institute to its All-Bran cereal.

By the mid 1980s the results of Kellogg’s renewed assault on the cereal market were mixed. The company’s hopes of raising per capita cereal consumption to 12 pounds by 1985 fell flat. But Kellogg did regain much of its lost market share, claiming 40% in 1985. And it continued to outperform itself year after year. In 1986 Kellogg posted its 30th consecutive dividend increase, its 35th consecutive earnings increase, and its 42nd consecutive sales increase.

In 1988 the company sold its U.S. and Canadian tea operations, in a demonstration of Kellogg’s renewed commitment to the cereal market. This commitment has taken on new life at Kellogg as a result of the movement in the 1980s away from fatty foods and toward grain-based products. This is a trend Kellogg has helped escalate with the introduction of healthier breakfast foods and advertisements stressing the importance of grains and grain products such as oat bran and other fiber.

Another key facet of Kellogg’s strategy continues to be the aggressive marketing and advertising support it gives it products in order to keep them growing in a fairly mature market. Kellogg also routinely spends lavish amounts to expand and modernize its production facilities, keeping actual production costs low and the company’s plants well positioned for growth.

Consumer demands for healthier and more convenient food will help Kellogg sustain growth during the 1990s. With an evergrowing U.S. market share, more than double the 20.5% share of closest-competitor General Mills, and an even-faster-growing 50% share of the foreign cereal market, Kellogg should remain in a strong condition even without diversification, but it will continue to look for ways to enlarge its market. More than once Kellogg has averted disaster by use of timely advertisements. It is a good bet that, like W. K. Kellogg himself, the company will continue to foster growth in trying times by the use of aggressive and innovative product development and marketing.

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Kellogg Company

Kellogg Company

For millions of people around the world, breakfast includes a bowl of Kellogg's cereal. Starting with just one product, the Kellogg Company added many other items over the years, targeting sugar-coated cereal at children and offering bran and other healthy grains to adults. In recent years, the company has moved beyond cereal, selling snack bars and other foods that can be eaten on the run.

Since its founding in 1906, the Kellogg Company has relied heavily on advertising to stir demand for its products. The company has also created several well-known cartoon mascots for its leading brands. Generations of children know Tony the Tiger, who roars about Kellogg's "Gr-r-reat" Frosted Flakes, and Toucan Sam, the colorful "spokesbird" for Froot Loops. Even as Kellogg's expands its offerings, cereal remains its most successful product, making the company the world's top cereal producer.

Health Food for Breakfast

The Kellogg Company was born in Battle Creek, Michigan, "the cereal capital of the world." Starting in 1876, Dr. John
Harvey U. H.) Kellogg ran the Battle Creek Sanitarium, a health spa that promoted a vegetarian diet and forbid its guests from drinking alcohol or smoking cigarettes. Kellogg began experimenting with breakfast foods made from grain, to replace the typical late-nineteenth century breakfast centered around meat, eggs, and other heavy foods. One of Kellogg's first inventions was granola, which combined wheat, oatmeal, and corn meal.

After trying granola at the sanitarium, many guests wanted to eat the cereal at home, so Kellogg established the Sanitas Food Company to make and sell the product. Dr. Kellogg had help running Sanitas from his younger brother Will Keith (W. K.). In 1894, the Kelloggs wanted to make a new wheat product that would be easy to digest. They tried putting boiled wheat through large rollers, hoping to make wheat flakes, but the process was a failure. After one batch of boiled wheat was accidentally left out to dry, the Kelloggs put it through the rollers, and this time the wheat formed small flakes. The brothers then baked the flakes, resulting in the first flaked cereal, which the Kelloggs called Granose.

Dr. Kellogg served his new cereal at the sanitarium, and Sanitas sold it by mail to former guests. By 1905, the company was also selling corn flakes, producing 150 cases a day. Sanitas had more than forty competitors by then, as other cereal companies sprang up in Battle Creek. W. K. Kellogg wanted to expand the business even more, but his brother disagreed. A biography of the younger Kellogg, The Original Has This Signature—W K. Kellogg, quotes his early thoughts on the business: "If given the opportunity, the food company would develop in such a manner that the sanitarium would be only a side show as to the food business."

Kellogg's and Corn Flakes

In 1906, W. K. Kellogg left his brother's sanitarium and founded the Battle Creek Toasted Corn Flake Company, selling a corn flake he had perfected at Sanitas. With his new company, Kellogg had the freedom he wanted to expand the business. He had already shown a genius for marketing, introducing the idea of offering cereal samples door-to-door. With his own company, Kellogg spent one-third of his money on a full-page ad in the Ladies Home Journal. Within a year, the Battle Creek Toasted Corn Flake Company sold more than 175,000 cases of its cereal. By 1909, annual sales of Toasted Corn Flakes reached one million cases.

In 1907, Kellogg shortened his company's name to the Toasted Corn Flake Company (later he changed it to the Kellogg Company). The same year, the company's factory was destroyed by fire, but Kellogg quickly built a bigger and better plant. In 1910, Kellogg's gave consumers their first premium—a free gift inside the cereal box—called "The Funny Jungleland Moving Pictures Book." Two years later, the company
introduced its second product, Krumbles, a shredded wheat cereal. Over the next several years, Kellogg's brought out two news cereals, 40% Bran Flakes and All-Bran.

Except for a brief time after World War I (1914-18), the Kellogg Company continued to grow. By 1920, the company produced thirty thousand cases of cereal per day in Battle Creek. A Canadian factory had opened in 1914, and the company expanded overseas in 1923, opening a plant in Sydney, Australia.

Depression Years and Beyond

In 1929, stock prices crashed, leading to the Great Depression. At a time when many businesses cut advertising costs, Kellogg doubled its budget for ads and profits rose. Kellogg's began sponsoring radio shows for children and introduced cartoon elves called Snap, Crackle, and Pop to sell Rice Krispies, which hit the market in 1928. By the end of the decade, the company had ensured its place as the world's largest cereal company, selling 40 percent of all cereal purchased in the United States and holding more than half of the international market.

By 1939, W. K. Kellogg had stepped down as head of his company, and Chicago banker Watson H. Vanderploeg became president. Kellogg had once hoped to turn control of Kellogg's to his son, John L., who had worked at the company during its early years. In 1925, however, a personal dispute between the two men led to John L. Kellogg's departure from the company. Kellogg then groomed his grandson, John Jr., as the next company head, but that plan did not work either. After a series of health problems, the younger Kellogg committed suicide in 1938. Vanderploeg, however, proved a fine successor, adding new products and taking them into new markets.

Guests at the Battle Creek Sanitarium included such business leaders as Harvey Firestone (1868-1938) and Henry Ford (see Ford Motor Company entry) and the explorer Richard Byrd (1888-1957). Another guest, C. W. Post (1854-1914), ate Kellogg's cereal and then launched his own successful cereal company.

In the 1950s, Kellogg's introduced its first sweetened cereals aimed at children. These products included Sugar Smacks and Sugar Frosted Flakes. To sell these new products, the
company advertised heavily on television and introduced cartoon characters identified with each brand. The first, Tony the Tiger, appeared in 1952. The company also focused on the diet concerns of adults, launching Special K as a healthy, low-calorie cereal. Later in the decade, Kellogg's introduced a new slogan: "The Best to You Each Morning."

Moving beyond Cereal

In 1964, Kellogg's introduced a new breakfast product, Pop Tarts. Heated in a toaster, these fruit pastries provided a sweet alternative to cold cereal. The company also began adding new products by purchasing other companies. In 1969, it bought Salada Foods, best known for its tea; the next year Kellogg's bought Eggo Waffles, another breakfast food designed for the toaster. Kellogg's also took over Fearn International, a company that sold soups and other foods to restaurants, and several small foreign food companies.

Some of this expansion came as Kellogg's faced problems with its core cereal business. In 1972, the Federal Trade Commission (FTC) accused Kellogg's and its two major competitors, General Mills and General Foods, of keeping smaller companies out of the cereal market and of overcharging customers. The companies denied the charges and were not penalized. Cereal companies also faced criticism from dentists and other groups who blasted the high sugar content of cereals designed for children. In 1978, sales of Kellogg's sugar-coated cereals fell for the first time. Overall cereal sales were also slowing, as the number of young people in the United States decreased. This segment of the population was traditionally Kellogg's best market. In addition, the company faced competition from store-brand cereals, which cost less than name brands such as Kellogg's.

During the early 1980s, Kellogg's tried to fight slumping sales in several ways. It returned to its Depression-era tactic of spending more on advertising. It also introduced new products. Some were targeted at children. Others, meant for adults, stressed good nutrition. In 1985, company chairman William LaMothe told Forbes, "[Health] is our thing.… Where else can you get such nutrition for twenty cents a serving?" By 1988, Kellogg's increased its annual sales more than 50 percent, going from $2.4 billion (in 1983) to $3.8 billion.

The company also had success with a new type of product, cereal and snack bars. It launched Smart Start Cereal Bars in 1989, then changed the name to Nutri-Grain in 1991. Other bars followed, and Kellogg's eventually became the leading seller of cereal and snack bars. These products were a response to changing eating habits. Fewer Americans were eating breakfast sitting at a table; they wanted food they could eat on their way to school or work. Snack bars promised quick energy boosts or a tasty treat any time during the day.

Problems with Modern Food Technology?

To j. H. and W. K. Kellogg, their cereals were health food. Starting in the 1930s, Kellogg's was the first company to put nutritional information on its packages. Later, during the 1980s, it introduced a number of cereals made from whole grains. While grains are healthier than grain that is heavily processed before it is cooked.

In recent years, however, Kellogg's and other large food companies have been questioned about using genetically modified foods. Scientists can change a crop's genes, the basic chemicals that control how all plants and animals develop and function. Genetically modified plants might grow faster, taste better, or resist insects. Some environmental groups believe these modified foods may be dangerous to humans. The organization Greenpeace has criticized Kellogg's for using genetically modified corn and soybeans in some of its products. In 2001, Kellogg's recalled corn dogs sold under its Morningstar Farms brand, after tests showed it contained traces of modified corn not approved for use in foods.

Surviving in a Constantly Changing Industry

During the early 1900s, Kellogg's sold some of the food companies it had bought earlier to focus on cereal and other breakfast foods. Competition was again tough, as consumers bought even more store-brand products, and major rival General Mills lowered its prices, forcing Kellogg's to follow suit. Overseas, a new partnership between General Mills and Nestle was stealing some of Kellogg's customers.

Once again, Kellogg's fought back with more advertising and new products. In 1997, it opened the W. K. Kellogg Institute for Food and Nutrition Research, where food experts tried to create new items. In 1999, a Kellogg's researcher told Fortune the company wanted "to make foods that are tastier, healthier, and easier." The Kellogg Institute's efforts included Rice Krispies Treats, snack bars based on the popular cereal, and an improved Raisin Bran that did not get soggy in milk.

Despite its innovations, Kellogg's saw its cereal sales remain basically flat after 1994. In 2001, the company tried to bolster sales by announcing a deal with the Walt Disney Company (see entry). Kellogg's began selling cereal featuring several popular Disney characters on the boxes, including Winnie the Pooh and Mickey Mouse. Kellogg's also took a major step into a new market when it bought Keebler, the second-largest cookie-and-cracker manufacturer in the United States.

After adding Keebler's products, Kellogg's made 60 percent of its sales from cereal, compared to 75 percent before the
deal. The year before the Keebler purchase, Kellogg ventured into another new area, buying Worthington Foods, the manufacturer of vegetarian "meat" products. A company founded on corn flakes has moved far beyond breakfast, while remaining a major international food corporation.

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Kellogg Company

Gale Encyclopedia of U.S. Economic History
COPYRIGHT 2000 The Gale Group Inc.

KELLOGG COMPANY

By the time Will Keith Kellogg (1860–1951) launched his cereal company—originally known as the Battle Creek Toasted Corn Flake Company—in 1906, he had already been in the cereal business for more than 10 years as an employee of his brother's Adventist Battle Creek Sanitarium. Dr. John Harvey Kellogg, a strict vegetarian and the sanitarium's internationally celebrated director, also invented and marketed various health foods. One of the foods sold by Dr. Kellogg's Sanitas Food Company was called Granose, a wheat flake the Kellogg brothers had stumbled upon while trying to develop a more digestible form of bread. The wheat flake was produced one night in 1894 following a long series of unsuccessful experiments. The men were running boiled wheat dough through a pair of rollers in the sanitarium basement. The dough had always come out sticky and gummy, until by accident the experiments were interrupted long enough for the boiled dough to dry out. When the dry dough was run through the rollers, it broke into thin flakes. Thus were flaked cereals born.

Commercial production of the Granose flakes began in 1895 with improvised machinery in a barn on the sanitarium grounds. The factory was soon in continuous production, turning out more than 100,000 pounds of flakes in its first year. A ten-ounce box sold for 15 cents, which meant that the Kelloggs collected $12 for each 60-cent bushel of wheat processed, a feat that did not go unnoticed around Battle Creek, Michigan.

Meanwhile, other cereal companies were growing quickly. Kellogg's most notable competitor was the Postum Cereal Company, launched by a former sanitarium patient, C. W. Post. Post added Grape-Nuts to his line in 1898 and by 1900 was netting $3 million a year, an accomplishment that inspired dozens of imitators and turned Battle Creek into the cereal-making capital of the United States.

In spite of the competition, Dr. Kellogg was slow in funding the company's expansion of cereal production. His brother, W.K. Kellogg assumed the leadership of that branch of the business and in 1902 Sanitas
improved the corn flake that it had first introduced in 1898. The new product had better flavor and a longer shelf life than the unsuccessful 1898 version. By the following year the company was advertising in newspapers and on billboards, sending salesmen into the wholesale market, and introducing an ambitious door-to-door sampling program. In late 1905, Sanitas was producing 150 cases of corn flakes a day with sales of $100,000 a year.

The next year W. K. Kellogg went into business for himself and launched the Battle Creek Toasted Corn Flake Company. Kellogg recognized that advertising and promotion were key to success in a market flooded with look-alike products, so the company spent a third of its initial working capital on an ad in Ladies Home Journal. The result was that sales jumped from 33 cases per day to 2,900 cases per day in 1907.

In July 1907 a fire destroyed the main factory building. On the spot, W. K. Kellogg began making plans for a new fireproof factory, and within a week he had purchased land at a site strategically located between two competing railroad lines. Kellogg had the new plant, with a capacity of 4,200 cases a day, in full operation six months after the fire. "That's all the business I ever want," he is said to have told his son, John L. Kellogg, at the time.

By the time of the fire, the company had already spent $300,000 on advertising but the advertising barrage continued. One campaign told newspaper readers to "wink at your grocer and see what you get." (Winkers got a free sample of Kellogg's Corn Flakes.) In New York City, the ad helped boost Corn Flake sales fifteen-fold. In 1911 the annual advertising budget reached $1 million.

By that time, W. K. Kellogg had finally managed to buy out the last of his brother's share of the company, giving Will Kellogg more than 50 percent of the company's stock. W. K. Kellogg's company had become the Kellogg Toasted Corn Flake Company in 1909, but Dr. Kellogg's Sanitas Food Company had been renamed the Kellogg Food Company and used similar slogans and packaging. Will Kellogg sued his brother for rights to the family name and finally prevailed in 1921.

In 1922 the company reincorporated as the Kellogg Company because it had lost its trademark claim to the name "Toasted Corn Flakes," and had expanded its product line so much that the name no longer accurately described what the company produced. Kellogg introduced Krumbles in 1912, followed by 40% Bran Flakes in 1915 and All-Bran in 1916. Kellogg also made other changes, improving his product, packaging, and processing methods. Many of those developments came from W. K.'s son John L. Kellogg, who had been working for the company since its earliest days. J. L. Kellogg developed a malting process to give the corn flakes more of a nutlike flavor. He also saved the company $250,000 a year by switching from a waxed paper wrapper on the outside of the box to a waxed paper liner inside, and invented All-Bran by adding a malt flavoring to the bran cereal. He held more than 200 patents and trademarks.

In subsequent decades the company continued to add new products, but it never strayed far from the ready-to-eat cereal business. In the early 1950s Kellogg's continued success was tied to two external developments: the postwar baby boom and television advertising. To appeal to the younger market, Kellogg and other cereal makers brought out new lines of presweetened cereals and unabashedly made the key ingredient part of the name. Kellogg's entries included Sugar Frosted Flakes, Sugar Smacks, Sugar Corn Pops, Sugar All-Stars, and Cocoa Crispies. The company created Tony the Tiger and other cartoon pitchmen to sell the products on Saturday-morning television. Sales and profits doubled over the decade.

In the 1980s Kellogg targeted a more health-conscious market. The company spent $50 million to bring three varieties of Nutri-Grain cereal to market in 1982. Two years later, Kellogg sparked a fiber fad when it began adding a health message from the National Cancer Institute to its All-Bran cereal. By the late 1990s Kellogg held about one-third of the U.S. cereal market and produced 12 of the world's top 15 cereal brands.

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